Averages

Everything is uh, well, normal. That is the point that Jack Hough makes in his Stock Screen article in the April 2009 Smart Money magazine. Well, this economy doesn’t feel normal. But Jack presents some data that may surprise many of us.

House prices are down 25% from their 2006 peak. But Jack quotes a survey by Moody’s, one of the rating companies, that shows the cost of a house today averages about 20 years worth of what they might rent for. “From 1983 to 1999 … most houses cost 13 to 15 years worth of rent.” By 2006, housing prices had gotten so high that they were priced at an average of 25 years worth of rent.

We read that American consumers contribute 70% to the overall economy and alarm bells have been sounding because the American consumer is not spending that 70% now. They are, in fact, spending closer to the 80 year average of 65%. What we are seeing is a return to the average from the abnormally high spending of the past decade. This spending was fueled by abnormally high housing prices.

We’re starting to get the point now. This is not economic Armageddon. It is a return to average. We’ve just gotten used to above average in the past decade.

The S&P500 index is about half of what it was in August 2007. But it trades at the 100 year long historical average of 15 times corporate earnings. Those earnings estimates have sunk 30%. But (we’re getting used to this ‘but’ by now) “in 2006, corporate profits were 26% above their long-term average as a percent of gross domestic income.”

This return to average hurts. The unemployment rate is expected to top 8% when the Bureau of Labor Statistics (BLS) issues their weekly update of new claims. The historical average is 5.6%.

The BLS recently reported a 0.4 percent in productivity in the nonfarm business sector in fourth-quarter 2008, as output fell faster than hours.

Unemployment up + productivity down = not good. Is the mattress the safest place for savings?

The steep decline in stock prices may have caused some to give up on stocks altogether. Jack looked at the twelve worst 10 year rolling periods and found that they are inevitably followed by 10 year periods where the average return is almost 11% per year.

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